When Sachem Head, the American hedge fund, declared a 3.4 per cent stake in Whitbread before Christmas and hinted that it would be pressing for a break-up, the only surprise was that it had taken so long for an activist investor to stick its head above the parapet. For many years, the group’s ownership of Premier Inn hotels and Costa coffee shops had looked like an anomaly, but so long as its share price was riding high and trading was good, it was easy to kick the demerger football into the long grass. Not any more.
It is unfortunate for Alison Brittain, the FTSE 100 leisure group’s chief executive, that the fall in the share price has coincided with her involvement with the 275-year-old company. When the former Lloyds banking executive was named as the next chief executive of Whitbread in May 2015, the share price was riding high at £52. When she took over six months later, it had fallen to £44. Before Sachem Head came along, the shares had hit about £35 amid economic and political uncertainty.
In fairness, Ms Brittain has not sought to duck the issue. From the moment she arrived, her language has been very different from that of her predecessor. While Andy Harrison responded to questions over a split with “never say never”, Ms Brittain has acknowledged that it’s an issue that has to be dealt with in the not-too-distant future. She has made clear repeatedly that she and her boardroom colleagues remain “open-minded” and regularly review the issue. Even before Sachem Head came along, her language had softened to “when rather than if”.
Now that Sachem Head has been joined in its campaign by the more high-profile Elliott Advisors, which last week revealed a 6 per cent-plus stake, all ears will be on the language Ms Brittain uses tomorrow when she unveils Whitbread’s full-year results. Saying that you’re open-minded about something is all very well, but actually doing it is quite another.
Sachem Head and Elliott are unlikely to be the only investors pressing for a split, which will ratchet up the pressure, and even if she still believes that now is not the right time to be spinning off Costa as a separately listed company, she will find it difficult to trot out the same lines.
Months of research into the pensions and tax implications of such a split is understood to have led Elliott to conclude that the demerger process would cost between £15 million and £20 million and would take between four and five months, while creating £3 billion of additional value. Sachem Head thinks it could take six to nine months, but broadly speaking the two activists seem to be singing from the same song sheet.
Their thesis is that, while Costa is experiencing a few more challenges than Premier Inn, the management of a standalone Costa would have a greater incentive to get the coffee chain back on the front foot. They dismiss the idea that Costa’s turnaround is best done within a bigger group, as Ms Brittain suggests, adding that a standalone Premier Inn also would be more likely to benefit from the higher valuation multiples of its hotel sector peers.
On the face of it, Ms Brittain has few weapons to stem the onslaught, with trading unlikely to improve much. The main bright spot is expected to be cost-cutting, with most analysts predicting that the £150 million target will be raised to between £200 million and £250 million. If the Whitbread chief can make a case that the savings are, at least in part, thanks to group-wide synergies, she may buy herself some time.
ADVICE Hold
WHY Activist shareholders are propping up the shares, now at £42.32, and should continue to underpin the price until a demerger takes place
Randgold Resources
When stock markets panic, gold bugs can enjoy glittering returns, so, amid persistent warnings that global stock markets are overvalued and may be on the verge of a sell-off, cautious investors seeking to hedge their portfolio might want to consider the options available among listed goldminers. Such shares are a good proxy on the price of physical gold, which is expensive and complicated to invest in directly.
Randgold Resources is one company that stands to benefit from any rally in the gold price. It operates five mines in Mali, the Democratic Republic of Congo and Ivory Coast. For most of the past decade, Randgold shares were the best performers among the world’s leading goldminers, a testament to its ability to deliver complex projects in remote and often challenging parts of the world.
Not recently, though. The shares have sunk by more than 23 per cent so far this year to £57.10 yesterday, making them among the worst performers in the industry.
That’s because the company’s prospects have been overshadowed by political problems in all three countries in which it operates, from strike action in Ivory Coast to a simmering dispute with the government in Mali over alleged back-taxes to a putative new mining code in Congo that threatens to sharply increase royalty payments to the country’s government.
Yet there is room for cautious optimism. Randgold remains in decent shape financially. The company has nearly $720 million in the bank and doubled its dividend last year as profits rose 14 per cent to just over $335 million. It also boosted gold production by for a seventh consecutive year in 2017 and held its production forecast for 2018 of 1.3 million to 1.35 million ounces. The company has raised its annual dividend every year since 2006.
All of which means that Randgold shares are trading at a discount because of its political troubles. If these can be overcome, the company stands to benefit from a strong operational record and any possible rally in gold prices. That makes Randgold a potentially attractive, albeit speculative, investment.
ADVICE Buy
WHY A solid company facing political troubles that could be overcome
